5 ‘secrets’ to stock selection

Lincoln Indicators
Written by

Lincoln Indicators

Mar 8th, 2022
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There are many reasons to invest in stocks. Some of us treat it as a bit of a punt, in it for the thrill of pitting our stock selection skills against other players in the market. Others look to the market as a generator of long-term wealth. Whatever the motive, with thousands of stocks listed on the Australian Stock Exchange (ASX), how can an investor choose which ones to buy? Let’s look at a few key considerations.

  1. Is the company growing its profits? In straightforward terms, the value of a company can be calculated by adding together all of its future profits. All else being equal, a company that consistently grows its revenue year on year will increase in value more quickly than a company with slower profit growth.
  2. How big is the company? Big companies may dominate their markets, reducing their potential for future growth. Companies with a smaller market capitalisation (share price multiplied by the number of shares on issue) may be younger and expand into new markets and industries that support more rapid growth. However, the share price of smaller companies may be more volatile. That can be attractive to investors who use periods of share price weakness to top up their holdings but less attractive to investors wanting more stability.
  3. How much debt does the company carry? If a company is paying lots of interest, then there’s less cash available to pay dividends and to invest back into the company’s core business. While a company may be able to use debt to grow, highly indebted companies are more likely to see their share price come under pressure in periods of market turmoil than their less indebted counterparts.
  4. What does the company do with its profits? There are two things that a company can do with its profits. It can re-invest them back into the business to boost its growth. Or it can pay dividends to its shareholders. Whether it’s best to opt for a high dividend, low growth company, or a low dividend, high growth, one depends on individual requirements. Many investors depend on dividends for their day-to-day income. Others prefer to forgo annually taxable dividends favouring capital growth that is only taxed when the profits are realised.
  5. Does a new stock complement currently held stock? The most basic risk management tool in an investor’s toolbox is diversification. Buying stocks in a big bank won’t provide much of a diversification benefit if the portfolio already holds many stocks in other big banks. Mixing financials with resource, biotech, or industrial stocks will deliver better diversification which can mitigate the risk of loss when one industry is underperforming.

There isn’t one single magic rule to building a stock portfolio. For one thing, much depends on the goals and circumstances of the individual investor, their attitude to risk, and prevailing market and economic conditions.

Whatever your situation, Stock Doctor can help you unlock the secrets of stock selection. Our Financial Health Model, proven for over 35 years, provides a fundamental investment principle. It encapsulates the thorough due diligence that investors need to undertake on a business’s financial accounts before deciding to invest in a stock that could provide a high return investment.

Get a FREE 14-day trial to Stock Doctor now.

Experience Stock Doctor yourself and discover Stock Doctor Star Stocks – growth stocks and income stocks identified by our exclusive quantitative methodology as having solid financial health and may be suited to meet an investor’s long-term investment objectives. Invest in facts, not opinions.

Lincoln Indicators
Written by

Lincoln Indicators

Mar 8th, 2022
Related topics
Information in this communication is current as of publication unless otherwise stated. It is provided for educational purposes only and may not reflect current market data or opinion. It should not be relied upon in respect to any current investment decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.

Important: This communication is provided by or on behalf of Lincoln Indicators Pty Limited ABN 23 006 715 573 (Lincoln), as Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167 for information and educational purposes only. This content may contain general financial product advice. It has been prepared without taking account of your personal circumstances and you should therefore consider its appropriateness in light of your objectives, financial situation and needs, before acting on it. Investments can go up and down. Past performance is not a reliable indicator of future performance. Shares and other investments may go up and down in value, and their past performance may not be repeated and gives no guarantee of future performance. Information in this communication was current as at the date of its preparation, unless otherwise stated, and may be subject to change.

You should read and consider our Important Information and our Financial Services Guide (FSG) which sets out key information about the services we provide. Where our advice relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Lincoln Australian Income Fund Product Disclosure Statement (PDS), Lincoln Australian Growth Fund Product Disclosure Statement (PDS) and Lincoln U.S. Growth Fund Product Disclosure Statement (PDS) for the product at www.lincolnindicators.com.au before making any decision.

At the date of preparation of this communication, Lincoln, Lincoln Financial Group Pty Ltd or directors, employees and/or associates of these entities "may hold" interests in these ASX-listed companies. Further information about particular stocks held by these entities or persons from time to time is disclosed within the Stock Doctor program and may change at any time without notice.

Lincoln, Lincoln Financial Group Pty Ltd, any directors, employees and agents of these entities, make no representation and give no warranty as to the accuracy of this communication and do not accept any responsibility for any errors or inaccuracies in, or omissions from, this communication (whether negligent or otherwise) and are not liable for any loss or damage howsoever arising as a result of any person acting, or refraining from acting, in reliance on any information in this communication. No person should rely on this communication as it does not purport to be comprehensive. This disclaimer does not purport to exclude any rights under, or warranties implied by, law which may not be lawfully excluded.

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All financial services are provided by Lincoln Indicators Pty Ltd ABN 23 006 715 573 (Lincoln) as the Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167.

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